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Case Details:

Case Code : FINC065
Case Length : 13 Pages
Period : 2010-2011
Pub. Date : 2011
Teaching Note : Not Available
Organization : -
Industry : -
Countries : India; Global

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“CDs bids are accepted only if there is large liquidity demand in the form of credit or for meeting large redemptions. The fund sell-off of CDs, in turn, resulted in pushing up CD yields in the secondary market.” 1

- C. Shivkumar , The Hindu Business Line, November 2009.

“Subscription to the CDs was mostly from cash surplus corporates, both private and in the public sector.”2

- A Trader, The Hindu Business Line June 2010.

Introduction

The months of May and June 2010 saw a huge sale of Certificates of Deposit (CDs). Mutual Funds (MFs) companies began to liquidate their holding in the face of the “Euro Crisis”3 to meet the obligations of the Foreign Institutional Investors4 (FIIs). As the fund houses had redeemed huge quantities of CDs, the interest rate of six-month CDs went up steeply to 6.3%. In May 2010, FII took a short position of Rs. 94.36 billion of equities and a long position in debt portfolio amounting to Rs. 24.50 billion from the point of view of short-term liquidity.5 The buyers of the CDs during this period were banks, who took a long position at a steep discount.

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1] C. Shivkumar, “CD Rates Likely to Plunge as Credit Growth Remains Low,” The Hindu Business Line, November 5, 2009.

2] C. Shivkumar, “Mutual Funds Liquidate CDs to Tackle Redemption Pressure,” The Hindu Business Line, June 7, 2010.

3] The Euro Crisis occurred (?) when the bond yield spreads and risk insurance on credit default swap escalated among member countries of the European Union -- Belgium, Greece, Ireland, Italy, Portugal, and Spain.

4] FIIs are large investors in MFs, particularly in the debt markets schemes. FIIs are not allowed to invest directly in CDs.

5] C. Shivkumar, “Mutual Funds Liquidate CDs to Tackle Redemption Pressure,” The Hindu Business Line, June 7, 2010. During May 2010, Rs. 94.36 billion = US$ 2.4 billion and Rs. 24.50 billion = US$ 535 million.

 

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